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Tuesday, October 12, 2010

They Do Not Believe

Last month I discussed the Insider Confidence in the stock market by looking at the number of corporate insiders buying vs. selling. To update, the ratio from the most recent week came in at 1,169 sales for every 1 purchase. Insiders do not believe in the rally.

Last week we received word that it has now been 21 weeks in a row that retail investors (401k and IRA funds) have been net sellers of the stock market. This is unprecedented and means that the average American has now been selling for three straight months. They do not believe in the rally.

The New York Stock Exchange short interest this morning was at 14.35 billion shares. 30 days ago it clocked in at 14.36 billion shares. Shorting a stock means you have sold it thinking its price will fall. You then buy back the stock in the future and pocket the difference in price.

The short sellers (professionals) do not believe in this market rally and they have not budged an inch as the market rose in September. They are still betting in a massive way that the market is ready to turn down. They do not believe in the rally.

UBS reported this morning that their client only long funds reported a one week outflow of $783 million ending October 1st. They reported a massive total outflow during the month of September. The clients do not believe in the rally.

So if the public, insiders, and short sellers are selling stocks across the board, who is doing the buying to cause stocks to surge higher last month?

It is hedge funds (who buy with leverage), primary dealers (who buy with money they are receiving from the Fed's bond purchases), and high frequency traders.

It is important to understand that when the market turns, these buyers will instantly become a cascade of sellers and they will have the ability to use leverage to the downside.

For a better understanding of high frequency traders, please take a look at the 60 minutes segment below.....

"We should be careful to get out of an experience only the wisdom that is in it and stop there lest we be like the cat that sits down on a hot stove lid. She will never sit down on a hot stove lid again and but she will never sit down on a cold one either."

- Mark Twain

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Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.

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- Ludwig von Mises

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"Do you want to sell sugared water for the rest of your life? Or do you want to come with me and change the world?"

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"The market can stay irrational longer than the investor can stay solvent."

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"While the government struggles to save one crumbling enterprise at the expense of the crumbling of another, it accelerates the process of juggling debts, switching losses, piling loans on loans, mortgaging the future and the future's future. As things grow worse, the government protects itself not by contracting this process, but by expanding it."

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The greatest enemy of knowledge is not ignorance, it is the illusion of knowledge.

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Illusions commend themselves to us because they save us pain and allow us to enjoy pleasure instead. We must therefore accept it without complaint when they sometimes collide with a bit of reality against which they are dashed to pieces.

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Many of life's failures are people who did not realize how close they were to success when they gave up.